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36CP

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Horngren'S Financial And Managerial Accounting
Found in: Page 1265

Short Answer

Preparing a flexible budget and performance report

This continues the Piedmont Computer Company situation from Chapter 22. Assume Piedmont Computer Company has created a standard cost card for the PCC model tablet computer, with overhead allocated based on direct labor hours:

Direct materials

$ 300 per tablet

Direct labor

3 hours per tablet at $26 per hour

Variable overhead

3 hours per tablet at $5 per hour

Fixed overhead

$54,000 per month

During the month of September, Piedmont Computer Company incurred the following costs while manufacturing 1,100 PCC model tablets:

Direct material

$341,000

Direct labor

88,000

Variable overhead

17,600

Fixed overhead

56,320

Requirements

1. Prepare a flexible budget for September for 900, 1,000, and 1,100 PCC model tablets. The tablet has a standard sales price of $675. List variable costs separately.

2. Using 1,000 PCC model tablets for the static budget, prepare a flexible budget performance report for September. Total sales revenue for the month was $767,800. The company sold 1,100 tablets.

3. What insights can the management of Piedmont Computer Company draw from the performance report?

  1. Flexible budget gross profit for each level of activity:

Units

900

1000

1100

Gross profit

$199,800

$228,000

$256,200

  1. Static budget variance is $36,880.
  2. The business entity is efficient in controlling its expenses and revenue.
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Step by Step Solution

Definition of Flexible Budget

The budget that gets adjusted according to the level of activity the company achieves is known as a flexible budget. This budget gets adjusted according to the business’s cost variation.

Flexible budget

Units

Budgeted per unit cost

900

1000

1100

Particular

Amount $

Amount $

Amount $

Sales revenue

$675

$607,500

$675,000

$742,500

Less: Direct material

$300

270,000

300,000

330,000

Less: Direct labor

$78

70,200

78,000

85,800

Less: variable overhead

$15

13,500

15,000

16,500

Less: Fixed overhead

54,000

54,000

54,000

Total cost of goods sold

407,700

447,000

486,300

Gross profit

$199,800

$228,000

$256,200

Flexible budget performance report

Particular

Actual results

Flexible budget variance

Flexible budget

Sales volume variance

Static budget

Units

1,100

1,100

1,000

Sales revenue

$767,800

$25,300

$742,500

$67,500

$675,000

Direct material

341,000

11,000

330,000

30,000

300,000

Direct labor

88,000

2,200

85,800

7,800

78,000

Variable overhead

17,600

1,100

16,500

1,500

15,000

Contribution margin

$322,200

11,000

$310,200

28,200

$282,000

Fixed expenses

56,320

2,320

54,000

0

54,000

Operating income

$264,880

$8,680

$256,200

$28,200

$228,000

Information is drawn from the performance report

Particular

Amount $

Flexible budget variance (F)

$8,680

Sales volume variance (F)

28,200

Static budget variance (F)

$36,880

The performance report reflects that the flexible budget variance, sales volume, and static budget variance are favorable. It means that the business entity can control the cost and sales revenue.

Most popular questions for Business-studies Textbooks

Question: Preparing an operating budget—sales, production, direct materials, direct labor, overhead, COGS, and S&A expense budgets

The Langley Batting Company manufactures wood baseball bats. Langley’s two primary products are a youth bat, designed for children and young teens, and an adult bat, designed for high school and college-aged players. Langley sells the bats to sporting goods stores, and all sales are on account. The youth bat sells for $40; the adult bat sells for $65. Langley’s highest sales volume is in the first three months of the year as retailers prepare for the spring baseball season. Langley’s balance sheet for December 31, 2018, follows:

Other data for Langley Batting Company for the first quarter of 2019:

a. Budgeted sales are 1,200 youth bats and 2,600 adult bats.

b. Finished Goods Inventory on December 31, 2018, consists of 300 youth bats at $14 each and 950 adult bats at $18 each.

c. Desired ending Finished Goods Inventory is 350 youth bats and 300 adult bats; FIFO inventory costing method is used.

d. Direct materials requirements are 48 ounces of wood per youth bat and 56 ounces of wood per adult bat. The cost of wood is $0.25 per ounce.

e. Raw Materials Inventory of December 31, 2018, consists of 24,000 ounces of wood at $0.25 per ounce.

f. Desired ending Raw Materials Inventory is 24,000 ounces (indirect materials are insignificant and not considered for budgeting purposes).

g. Each bat requires 0.7 hours of direct labor; direct labor costs average $18 per hour. h. Variable manufacturing overhead is $0.30 per bat.

i. Fixed manufacturing overhead includes $1,300 per quarter in depreciation and $20,140 per quarter for other costs, such as insurance and property taxes.

j. Fixed selling and administrative expenses include $9,000 per quarter for salaries; $2,500 per quarter for rent; $1,000 per quarter for insurance; and $200 per quarter for depreciation.

k. Variable selling and administrative expenses include supplies at 2% of sales.

Requirements

1. Prepare Langley’s sales budget for the first quarter of 2019.

2. Prepare Langley’s production budget for the first quarter of 2019.

3. Prepare Langley’s direct materials budget, direct labor budget, and manufacturing overhead budget for the first quarter of 2019. Round the predetermined overhead allocation rate to two decimal places. The overhead allocation base is direct labor hours.

4. Prepare Langley’s cost of goods sold budget for the first quarter of 2019.

5. Prepare Langley’s selling and administrative expense budget for the first quarter of 2019.

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